A front page news article in today's New York Times refers to "President Biden's economic agenda, which aims to reduce the nation's $7 trillion of uncollected tax revenue and use the funds to combat climate change, curb prescription drug prices and pay for other initiatives prized by Democrats."
The phrase "$7 trillion of uncollected tax revenue" was a new one to me. What you and I think of as "private property," Biden and the New York Times refer to as "uncollected tax revenue."
Treasury Secretary Yellen is out talking about this "$7 trillion" number publicly. On April 4, she said, "Absent our new investment in the IRS, the tax gap – the gap between taxes owed and those actually paid – was estimated at around $7 trillion over the next decade."
It's breathtaking, because if Biden went to Congress or the voters for authorization to raise taxes by $7 trillion to pay for a big-government spending binge, he'd be resoundingly rejected. The government already taxes and spends plenty, and taxpayers are bearing a sufficient burden already without being tapped for an additional $7 trillion, which is a huge sum. As context, the federal government's total spending for 2022 was about $6.3 trillion, and the U.S. GDP for 2022 was about $26 trillion.
I thought maybe $7 trillion was a typo or a Times error, but it comes straight from the Biden administration Treasury Department, which claims that "wealthy taxpayers...are often able to avoid a large share of the taxes they owe" via "opaque income sources that accrue disproportionately to higher earners—like partnership income, proprietorship income, and rental income."
The Biden Treasury attributes the fantastical estimates about vast sums available for extraction ("noncompliance can reach 55 percent") to "academic researchers."
Yet the two papers cited by the Treasury are sketchy. Neither one was been published in a peer-reviewed academic journal. The lead author of one paper is an associate professor at the University of South Carolina; the article was published in Tax Notes, a "nonprofit" that is behind a paywall with a subscription pricing structure that could teach high earners something about opacity. If Treasury want to rely on this research for the claim that there is $7 trillion in "uncollected tax revenue" out for the picking, let Treasury make a non-paywalled copy of the research available to the public for inspection.
The second article is a working paper from the National Bureau of Economic Research ("Tax Evasion at the Top of the Income Distribution: Theory and Evidence") in which two of the five authors are IRS employees and a third is Gabriel Zucman, who according to the New York Times was denied tenure at Harvard "partly over fears that Mr. Zucman's research could not support the arguments he was making in the political arena." The working paper reports, "we estimate that 36% of federal income taxes unpaid are owed by the top 1% and that collecting all unpaid federal income tax from this group would increase federal revenues by about $175 million annually."
The idea that there is $600 billion a year (or $7 trillion over ten years) in tax cheating going on is based on estimates that project, to the rest of returns, what auditors find in audited returns. But the audited returns are not all randomly selected, so the assumption that they are an accurate representation of the remainder of the sample is questionable. The IRS doesn't say how many audits its claims about vast tax evasion are based on.
What's driving the Treasury claims? Beyond the political convenience of being able to fund vast government spending schemes without having to win an explicit vote for the vast tax increases that would pay for them, there is a kind of resentment, a divisiveness that is simmering. The Treasury rationale, by Natasha Sarin, who has since fetched up on the Yale Law School faculty, refers to "two sets of rules: one for regular wage and salary workers who report virtually all the income they earn; and another for wealthy taxpayers." By "wealthy taxpayers," Treasury means that "partnership income, proprietorship income, and rental income." Basically, the government employees and the professors, who get paid with a W-2 form, think the small-business people who file Schedule C or get K-1 forms are a bunch of cheats.
It's an empirically answerable question. But the government and university employees sending out IRS auditors to harass successful small-business people, with the assumption that the small-business people are illicitly concealing $7 trillion in "uncollected tax revenue," is going to be an unpleasant adventure for all concerned. My prediction about the outcome is that it will enrich tax lawyers and accountants. It may also prompt a political backlash so fierce that the enforcement program is discontinued before $7 trillion is collected, but also before the Democrats are forced to acknowledge that the $7 trillion number was a fantasy to begin with. That would leave it as an option remaining on the table for reuse the next time around that politicians want to spend money without taking the difficult step of actually voting to increase tax rates in the transparent way set out in the Constitution.
